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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Do We Need Price Controls in Aviation?



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At The Washington Monthly, Phil Longman, America’s most creative champion of industrial policy and social engineering, and Lina Khan make the case for price controls in commercial aviation. Though I’m a fan of Phil’s work — we’re both concerned about “the birth dearth,” an issue he helped put on the map with his provocative book The Empty Cradle and we share a strong belief in the potential of freight rail – he has far more faith in the ability of regulators to anticipate and manage technological shocks and to act in an even-handed manner that doesn’t disadvantage new entrants than I do. 

Longman and Khan are motivated in part by a concern for cities and regions that have been disadvantaged by the ongoing consolidation of the commercial aviation industry.

It requires a tremendous amount of energy just to get a plane in the air. If the plane lands just a short time later, it’s hard to earn the fares necessary to cover the cost. This means the per-mile cost to the airlines of short-haul service is always going to be much higher than that of long-haul service, regardless of how the industry is organized. Yet the value of airline service to the public and the economy depends on providing connectivity to as many places as possible. Thus, without some form of cross-subsidization between short hauls and long hauls, the economic benefits of the network will be compromised. Fewer people will be flying to fewer places, which by itself hinders economic activity, while the high fixed cost of the remaining service has to be spread among a diminished number of passengers.

It is worth noting that technological shocks have had powerful impacts on the hierarchy of U.S. cities on a number of occasions, e.g., the creation of the Erie Canal helped cement the rise of New York city relative to its rivals on the eastern seaboard as a commercial center; the rise of rail undermined St. Louis, which flourished during the age of riverine transport, and helped fuel the growth of Chicago. In a similar vein, the technological shock of air conditioning helped fuel the rise of Sunbelt cities. One could argue that the consolidation of air traffic in and around a handful of hub airports is also a technological shock, though in this case the technology in question is a business practice that has emerged in a competitive environment.

So how do we decide what is an appropriate or just hierarchy of cities? Longman and Khan are subtly critical of those creative class types who fly over the flyover states and are indifferent to the fate of our nation’s industrial heartland. This is politically shrewd. But there is every reason to believe that cities that lose under the status quo will flourish when some new technology alters today’s urban hierarchy. As commercial aviation grows increasingly unpleasant, for example, we might see a rise in air taxis (provided we improve the functioning of our air traffic control system, which strikes me as a far more pressing issue) or a further concentration of workers in dense megaregions and a concomitant decrease in air travel. Or we might see a new wave of innovation that reduces the need for face-to-face contact.

Moreover, technological shocks that have a negative impact on cities like Cincinnati wouldn’t necessarily have a negative impact on people who currently live in Cincinnati but who might at some point in the future live in Dallas or New York. And then, of course, there is the environmental impact: air travel is very carbon-intensive. 

What would have happened if the federal government decided to intervene in the national transportation network during the nineteenth century in an effort to defend the interests of St. Louis and stymie the rise of Chicago? As a devotee of Robert Fogel’s Railroads and American Economic Growth, my sense is that something close to the opposite happened, i.e., the federal government foolishly subsidized the railroads, thus undermining barges and unfairly disadvantaging one region at the expense of another and one industry at the expense of another. Fogel posits that in the absence of railroads, the trajectory of U.S. economic growth might have been the same as it was in our world, yet America’s economic geography would be strikingly different. We might try to reach some political consensus about what America’s economic geography should look like over the next century, but I’m not sure that’s sensible. 

One danger of living in affluent, risk-averse society is that incumbent interests in cities like Cincinnati, etc., will extract resources from taxpayers across the country to defend what they have. And if they succeed, interests in other regions will be more inclined to do the same, thus creating a beggar-thy-neighbor dynamic in which every region must lobby the new regulators to play defense. Politicizing, or rather further politicizing, the route map of U.S. airlines is fundamentally about privileging some regions at the expense of others. It is hard to adjudicate the question of whether we should devote resources to helping Cincinnati landowners vs., say, landowners in emerging aviation hubs. Concentrating these decisions in the hands of political authorities will raise the stakes of elections, which pro-Cincinnati interests will occasionally lose. I can see why Cincinnati landowners might give it a try anyway — perhaps they think it’s better to try their luck in Congress than to rely on some whiz kid to invent a new transportation technology that will give Cincinnati a leg up. I’m just not sure we should go along with this politicization over innovation approach. 

Back in 2008, Edward Glaeser and Joshua Gottlieb offered a brief summary of the case against place-based policies:

Place-based policies that aim to turn a declining region around are often thought to be futile, since the forces of urban change are quite powerful. Place-based policies that throw enough resources at a small enough community may indeed be able to improve the quality of that place, but it is not obvious that the poorer residents of that community will benefit. Some community-based policies may just lead employers to come to the area and hire new migrants. Others may make the community a more attractive place for outsiders to live and thus increase rental costs for longer-term residents. In general, the spatial equilibrium model leads economists to think that place-based improvements increase the value of property, which may be a good thing for local homeowners and landlords, but may not be so desirable for renters.

Finally, economists have voiced a basic skepticism about the desire to induce poor people to stay in poor areas. Place-based policies may boost a poor area, but they may also discourage poor people from leaving that area for areas where opportunities may be greater. The rationale for spending federal dollars to try to encourage less advantaged people to stay in economically weak places is itself extremely weak. For example, it is not clear why the federal government spent over $100 billion after Hurricane Katrina to bring people back to New Orleans, a city that was hardly a beacon of economic opportunity before the storm.

Glaeser and Gottlieb are referring to direct subsidies rather than regulatory efforts to redesign the national aviation network to give a leg up to small and mid-sized metropolitan areas, but I think their observations are no less salient.

In National Affairs, Tyler Duvall offered a very different diagnosis of the key challenges facing the U.S. aviation system from that of Longman and Khan. I recommend checking it out.



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